Mosaic Co. Offers a Very Compelling Investment Profile

The relationship between grain prices and fertilizers is pretty clear.
It’s all about profits. Let’s take corn. Higher corn prices mean more
profits for farmers. Fertilizers help grow more crops. So high corn
prices encourage more corn planting – which leads to more fertilizer
use. At today’s prices for corn and fertilizer, a US farmer can clear
about $2 a bushel on corn. So net cash income is high for farmers right
now. Today’s farmer also carries low levels of debt, relative to times
past.

All of these factors add up to one very likely result: robust demand
for fertilizer.

About a year ago, I urged the subscribers of my investment letter,Capital & Crisis, to invest in PotashCorp (NYSE:POT), the world’s
leading supplier of potash fertilizer. The stock has nearly doubled
since then. Despite the strong performance, I still consider POT a very
solid long-term investment. But POT is not the only attractive
opportunity in the fertilizer sector. The Mosaic Co. (NYSE:MOS) also
offers a very compelling investment profile.

Mosaic is the leading producer of phosphate fertilizer and the No. 2
producer of potash. The company, which operates primarily in Canada and
the US, generates about half of its earnings from potash and half from
phosphate. However, the company will be expanding its potash production
from 10.4 to 16.8 million tonnes over the next 10 years. This will move
the business mix to about 60% potash and 40% phosphate. A good thing
too, as the investment case for potash is the strongest of all the
nutrients. (High-quality potash mines are scarce, and most of them are
in the hands of only a few players.)

This fact does not diminish the potential of Mosaic’s phosphate
business, as the company’s phosphate operations are among the lowest
cost in the industry. But I think Mosaic’s potash operations provide
most of the sex appeal for this stock.

This year, worldwide potash purchases fell to unprecedented lows. In
the first half of the year, the major markets cut their import needs
dramatically, as the nearby chart shows.

As a result, potash prices and volumes fell. That is why Mosaic’s stock
price is 60% off its all-time high of $163. Yet the long-term picture
looks as bright as ever for this stock. So I’m expecting a big rebound.

One other potash-specific nugget: Passport Capital estimates that the
potential demand for potash just from the BRIC countries – Brazil,
Russia, India and China – is about 30 million additional tonnes. That’s
a big nut for a market that has only 54 million tonnes of total
capacity right now.

So Mosaic sells a product that is not going out of style anytime soon.
Investors can afford to wait for the rebound, which could begin as
early as next spring, when the new planting season begins.

But even if fertilizer demand does not recover as quickly as I expect,
Mosaic’s solid balance sheet provides a large margin of safety. The
stock sells for less than its net asset value, or what it would cost
you to rebuild the company from scratch. As you can see, Mosaic’s NAV
is about $68 per share, compared to the current price of $60 per share.
[The stock was changing hands below $50 when I recommended it to my
subscribers on November 6. But I would still recommend buying MOS on
pullbacks].

This table utilizes approximate replacement values based on industry
estimates to start, say, a new potash mine. But these estimates give no
additional credit for the fact that it would take at least seven years
to get a new potash mine up and running; or that it would take three to
four years for a new phosphate facility. Add a few more years to those
numbers if you would need to install infrastructure like ports, rail
and roads.

At current potash prices, new expansions don’t make economic sense.
Many new projects have been deferred or canceled altogether, which sets
up the potential for more bottlenecks and price spikes in the future.

Cargill owns 64% of The Mosaic Co., which means that there is some
rock-solid agricultural expertise behind this company. Cargill,
privately owned, is a large agricultural firm. It started with W.W.
Cargill’s small granary on the American frontier in 1865. Today,
Cargill employs 159,000 people in 68 countries. James Prokopanko, the
CEO, is a Cargill man. (He is a former Cargill VP. Much of the Mosaic
board has connections with Cargill.) Rest assured he doesn’t do much of
anything without checking in with the boys in Minneapolis first.

Mosaic is an excellent way to participate in the long-term bull market
for agricultural commodities. If things play out as I think they will,
the stock could be a $100 by next spring.

Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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